Simple portfolio and on compounding

Over the past few days different people have discussed with me some investing related topics. I think that the more i talk to people, the more i realise that getting "average return" for most people is a very hard thing to do. The heart wrenching feeling of watching your investments from your hard earned savings getting halved is too great a pain to bear. Thus most people buy when everyone is buying, and sell when everyone is selling (feeling safety in numbers), inadvertly causing disappointing performance.

I think that for some people, simply buying an insurance plan that has not much hidden expenses is a good way to save for retirement. It is not that insurance plan are great investment, but the fact that people can't access daily quotations save them a lot of pain and that you are lock into the plan for the long term also forces people to stay the course. If lower investment return and higher expense is what it takes to instill dicipline in people to save for their retirement, then so be it.

For those that have the ability to control their emotions when it comes to investing, i still think that have a simple portfolio plan that is low cost and then sticking to it is the most optimal way to save for a comfortable retirement. Zhao Bin sent me this article last week and it think its advice is both sound and timely. I especially like David Swensens's portfolio, but it is expensive to create such a portfolio in singapore. I've applied largely the Dr. Bernstein's No-Brainer portfolio for the portfolio i manage for my parents. Over the past 3 years, the results have been fairly decent.

I think that for most of us, active stock picking should be more of a hobby (hopefully not an expensive one) than to think to get rich through that. And unless you are diligent enough to find those companies that you truly understand, have great economics (as Andrew said, those that 'shit cash' year after year), and purchased at a inexpensive price, it is most likely a foolish to think that we can do significantly better than long term market average.



On Compounding (and on how to become a millionaire...at a rather old age)

We have all learnt arithmetic and geometric series in our secondary school days. To get really rich, we HAVE to engage in geometric return type of activity.

I've shared the following example with many of my friends from E.y.E. Investment Club.

A) Boi boi started teaching tuition at 18, and makes $800 a month. He invested every single cent into an stock index fund and does this for 4 years. And once he reached the age of 22, he stopped the plan and never touched the money in the fund ever again. So the total amount of money invested is $38,400. Boi boi retired at the age of 60.

B) Mr I'm-so-smart, is great at studying and and finally managed to get a PhD by the age of 28. He is now a chemist employed at a big oil firm earnings 10k a month. He realised the importance of saving and started saving $10,000 every year for the next 31 years before he retired at the age of 60. The total invested amount $310,000.


At 10% compounded return, guess who will be richer when they retire?

a) boi boi who invested $38k by the age of 22

b) Mr I'm-so-smart who invested a grand sum of $310k.











The answer is...as most of you would have guessed, Boi boi!

By the age of 60, (old) Boi boi would have accumulated $1,833,148 and Mr I'm-so-smart $1,819,434.

The main difference is that Boi boi invested about one tenth of what Mr I'm-so-smart did and ended up ahead.

Morale of the story: START COMPOUNDING EARLY!

and yes, anyone younger than me stand a way better chance at beating me in the game of compounding. So i'll strike back by either compounding at higher rate of return, or i'll stay in the compounding game longer - Outwit . Outplay . Outlast

Anyone who's interested in the spreadsheet used to arrive at the above numbers just drop me an email. It quite fun to see how total retirement sum is affected by years of compounding, invested capital and rate of return.